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Protecting your intellectual property rights

  1. 1. 7P. Chaudhry and A. Zimmerman, Protecting Your Intellectual Property Rights,Management for Professionals, DOI 10.1007/978-1-4614-5568-4_2,© Springer Science+Business Media New York 2013IntroductionProduct counterfeiting is a well-known problem, one that has been with us for avery long time. Trademarks go back to ancient times and where there are trade-marks counterfeiting soon follows. Recently more attention is being paid to fightingthe problem. It would seem the first logical step would be to determine the size ofthe counterfeit market. But estimating the extent of this illicit trade is a difficult task.First, no direct measurement of counterfeit trade can be undertaken, since bydefinition this is an illegal activity. Customs seizures are such a small percentage ofoverall trade that it is impossible to draw conclusions from these statistics. Manyorganizations, including the US General Accountability Office (2010), haveattempted to estimate the size of the counterfeit market and have described themajor flaws in every method which tries to put a definite size on it. This chapterexamines the history of counterfeiting, reviews the challenges of measurement, anddescribes the products most often counterfeited and the constituencies hurt by thepractice. Finally the chapter describes the seven major drivers of the growth incounterfeit trade.History of CounterfeitingCounterfeiting is not a new business phenomenon and has been affecting trade forat least 2,000 years. Pliny the elder described counterfeit coins as popular collec-tor’s items for Romans (Barry 2007). The counterfeiting of coinage was part of thenormal exchanges involving smuggling, minting privileges, alchemy, and foreigntrade in Genoa in the sixteenth and seventeenth centuries. Goldsmiths, soldiers,bankers, convicts on galleys, and even priests were involved in developing counter-feit coinage. A famous example of counterfeiting occurred in Renaissance Francewhen, over a 10-year period, supporters of the Pope directed parallel minting toChapter 2The Global Growth of Counterfeit Trade
  2. 2. 8 2 The Global Growth of Counterfeit TradeundermineofficialcoinageissuedbyaProtestantKing.Since“officialcounterfeiting”was reserved for princes the penalties for doing this were rather severe and includedbeing boiled alive (Grendi 1994; Gillard 1990).But product counterfeiting may even be older. Babylonian and Egyptian priestsplaced inscriptions from earlier civilizations on monuments to increase theirproceeds and legitimacy (Hopkins et al. 2003). The advent of trademarks used toidentify manufacturers of particular products certainly created the opportunity forcounterfeiting. Some form of trademark has probably been in use since ancienttimes. Marked pottery appeared in China four to five thousand years ago and Greekvases identified both the maker and also the wholesaler of the item. Merchant’smarks appeared in about the tenth century. These were used to prove ownership ofgoods. In Japan lumber was marked when tied onto a raft before being sent downriver (Ono 1999).Roman builders indicated the maker of bricks and tiles by stamping an identify-ing mark on them. Marcus Sestius, a Roman wine merchant, apparently lost a largeshipment of branded wine jars when his ship went down off the coast of Marseillesprobably in about 230 BCE (Rokicki 1987). During the first three centuries of theRoman Empire oil lamps were made using the FORTIS brand name. Many artifactswith this name have been found which may indicate widespread product copying atthe time (International Trademark Association 2007). Pliny also warned of counter-feit opals made of glass (Sidebotham 1986). While there is no record of legalenforcement of trademarks during Roman times it appears that the Romans pun-ished abuses through their commercial institutions (Paster 1969).During the Middle Ages guilds required craftsmen and merchants to affix markswhich distinguished their products from low-quality imitations. The main functionof these marks was to assign responsibility for inferior products (Ono 1999). By thethirteenth century trademarks were common in England. In fact a compulsory mark-ing law required that a baker put his mark on every loaf of bread and goldsmithswere required to place marks on their work. During this time trademark infringe-ment became a crime and in some cases rather draconian capital punishment wasapplied to abusers (Abbott and Sporn 2002). Stolte (1998) identifies the earliesttrademark infringement action in England, Sandforth’s Case, heard in 1584. Theplaintiff had manufactured woolen clothing marked with the letters J. G. and a signcalled a tucker’s handle. The defendant had made similar clothing which were “ill,insufficient and unmerchantable; and deceitfully marked … J.G.”In the Aztec Empire some dishonest dealers sold counterfeit cacao beans. Honestsellers divided beans into piles according to their origin. But the counterfeiters usedartificial coloring to sell inferior beans or even disguised worthless amaranth doughor avocado seeds with cacao hulls (Rust 1999). Fifteenth century Chinese paintersaccommodated forgeries by other artists (Alford 1995). In the seventeenth centuryDomingo Navarette, a Spanish priest, noted the Chinese ability to copy products. Hecomplained that the Chinese had “imitated to perfection whatsoever they have seenbrought out of Europe” (The Economist 2003).Product counterfeiting came to the attention of the US government more than100 years ago. William Eleroy Curtis (1889), reporting for the government, wrote
  3. 3. 9Measuring the Counterfeit Market“the superiority of American [cotton] goods is so great that the Manchester [England]mills send few goods to South America that do not bear forged American trade-marks.” In his report, Curtis quotes a member of the New York law firm of Smith,Hogg and Gardner as having recovered damages and costs in Manchester (UK)“although we have great difficulty in definitely locating the forgeries.”Of course the United States has not been innocent of piracy. It has been claimedwith some accuracy that the Industrial Revolution in the United States began withsignificant help from an industrial spy, Samuel Slater. The English textile industrygrew rapidly based on the invention of the water spinning frame by RichardArkwright. The British wanted to be sure that this invention never reached Americasince it was the world’s largest exporter of cotton but had no manufacturing industryof its own. By 1774 it was illegal for an English textile worker to share technologi-cal information or to leave the country. Slater, born in England in 1768, started as anapprentice in a cotton mill owned by a former partner of Arkwright and eventuallybecame a supervisor. In America both state governments and entrepreneurs wereoffering rewards for machines like Arkwright’s. After reading in a Philadelphianewspaper of a £100 bounty paid to the designer of an inferior cloth-makingmachine, Slater came to New York in 1789. He was able to reconstruct the entireEnglish mill from memory and eventually, with the support of a Rhode Island mer-chant, built the first water-powered cotton spinning mill in America (BBC 2007; 2007). Although creating a system of patents and copyrights was a priorityfor George Washington, the Patent Act of 1793 did not provide protection for for-eign inventors. This meant that an American could copy any product patented in aforeign country and then apply for a US patent (Choate 2005). The same held truefor copyright. In the country’s infancy product copying and literary piracy werecommon. Charles Dickens, visiting the United States in 1842, was irate when hefound many pirated copies of his novels in Boston bookstores. After Gilbert andSullivan suffered a large loss of revenue when a number of successful pirated pro-ductions of H.M.S. Pinafore opened in the United States, they decided to premieretheir next opera, Pirates of Penzance, at the Fifth Avenue Theatre in New York inorder to be protected by the US copyright law (Gilbert and Sullivan 1960). In nine-teenth century America it was common to find counterfeit foreign wines, gloves,and thread (Mihm 2007).Measuring the Counterfeit MarketIn 2008, the US government estimated the global market value of the counterfeitindustry at $500 billion with a growth rate of 1,700% over the past 10 years(U.S. Customs and Border Protection 2008). The estimates for the size of theworldwide counterfeit goods market seem to have coalesced around $600 billionannually. In 2012, The IACC reports that “[c]ounterfeiting is a $600 billion a yearproblem. In fact, it’s a problem that has grown over 10,000% in the past two decades,in part fueled by consumer demand.” But searching behind this well-worn estimate
  4. 4. 10 2 The Global Growth of Counterfeit Tradereveals a serious problem with this “accepted wisdom.” Estimates of the counterfeitgoods market range from as low as $200–600 billion to as high as $1 trillion. Sincethere is little agreement on definitions and serious problems of measurement, it isnot really clear what the right number is. Following is a brief examination of thisproblem.Attempting to measure the global value of counterfeit products is excruciatinglydifficult. This is understandable given the illegal nature of this activity. The onlyreal data are surrogate indicators such as seizures of pirate product by police orCustoms authorities. In addition, there is no agreement on factors that should beconsidered when calculating the scale of counterfeiting. Should the estimate includesales lost by specific brands and at what prices, damage to brand equity, total salesof counterfeits, or some combination of these factors? (Green and Smith 2002). Thelatest attempt to quantify the counterfeit goods market was completed by the USgovernment’s General Accountability Office (GAO). In developing their informa-tion the GAO interviewed government officials, representatives of industry associa-tions, academic institutions, and firms and reviewed several existing documents andstudies. The GAO concluded that counterfeit product is a significant problem but“quantifying the economic impact of counterfeit and pirated goods on the US econ-omy is challenging primarily because of the lack of available data” (GAO 2010).The GAO report focuses on two key assumptions in measuring counterfeitgoods—substitution rate and value. The former is the rate at which the buyer is will-ing to switch from a fake good to the genuine product. If the rate is assumed to beone-to-one, it must be assumed that the fake is nearly identical to the real product,the buyer is paying full price for the fake, and the buyer is not aware of buying afake. These assumptions are rarely all true at the same time. Value focuses on thelevel in the production chain at which the good is priced—production cost or retailprice for instance.The GAO found that commonly cited figures for counterfeit products are oftenattributed to the US government sources such as the Federal Bureau ofInvestigation (FBI) or the Customs and Border Protection Service (CBP).However, the FBI, when asked about their numbers by the GAO, claimed thatthey have “no record of source data or methodology” for their estimates and theCBP could not identify the origin of their figures and has informed its staff todiscontinue their use (GAO 2010).Several methods have been used to calculate the size of the counterfeit goodsmarket including extrapolation from counterfeit goods seizures, survey of supplyand demand, use of economic multipliers, and even the “rule of thumb.” Each ofthese methods faces daunting challenges to accuracy and none of these methods canbe relied upon.Some economists even question the idea that there are losses associated withcounterfeiting. The point is that consumers who buy fakes are a market segment thatpurchases counterfeit because of their inability to afford the genuine product.Therefore, buyers in that segment do not really represent lost sales. The argumentcenters on the idea that these consumers would not have bought the genuine productanyway.
  5. 5. 11Negative Effects of Counterfeit GoodsThe Organization for Economic Cooperation and Development (OECD 2007)states, after an in-depth look at the attempts to measure this market, “the overalldegree to which products are being counterfeited and pirated is unknown, and theredo not appear to be any methodologies that could be employed to develop an accept-able overall estimate.”Negative Effects of Counterfeit GoodsThe existence of a large counterfeit market takes its toll in many ways. The harmedconstituents are identified in Fig. 2.1. Obviously consumers may be harmed byusing inferior products. This damage can be as minimal as the loss of a few dollarsor disappointing product performance or as important as serious injury to physicalwell-being. The World Health Organization (WHO Fact Sheet No. 275) claims thata high percentage of medicines on sale in Africa, parts of Asia and Latin Americamay be what they call SFFC (Spurious/falsely labeled/falsified/counterfeit) medi-cines. The US Center for Disease Control states “Overall, global estimates of drugcounterfeiting are ambiguous, depending on region, but proportions range from 1%of sales in developed countries to more than 10% in developing countries. In specificregions in Africa, Asia, and Latin America, chances of purchasing a counterfeitdrug may be higher than 30%” (Green 2011). In 2010, the United Nations Office onDrugs and Crime cautions the growing concern about counterfeits encroaching onunsuspecting consumers as “[P]roduct counterfeiting is a form of consumer fraud:DamagefromCounterfeitGoodsConsumersHomeCountryHostCountryIPR OwnersWholesalersandRetailersFig. 2.1 Damage fromcounterfeit goods market
  6. 6. 12 2 The Global Growth of Counterfeit Tradea product is sold, purporting to be something that it is not. The practice iswidespread—products destined for 140 countries were detected in 2008—and posesa serious global challenge. The branding of a product provides implicit qualityassurance and a legal line of accountability that consumers have come to take forgranted” (United Nations Office on Drugs and Crime 2010, p. 10).In the past decade, bad news from China emphasized that the problem of coun-terfeit goods can be a matter of life and death. In less than a week cough syrupcontaining ethylene glycol was identified as responsible for the deaths of hundredsof people in Panama and the Dominican Republic, toothpaste tainted with the samechemical had been found on three continents (Castle 2007), and a cell phoneexploded killing a 22-year-old man in western China. Phone manufacturers,Motorola and Nokia, blamed counterfeit batteries (Barboza 2007). These episodesfollowed the tainted pet food problem which surfaced in the United States in thespring and summer of 2007.Overall, the problem of fakes is not just in luxury goods, but an array of illicitproducts ranging from counterfeit baby formula to fake auto parts have been reportedin the media for the past decade. In 2011, USA Today claimed that even the US mili-tary is not immune to counterfeit goods and reports that “investigators found thatcounterfeit or suspect electronic parts were installed or delivered to the military forseveral weapons systems, including military aircraft such as the Air Force’s C-17and the Marine Corps’ CH-46 helicopter, as well as the Army’s Theatre High-Altitude Area Defence (THAAD) missile defense system.” (USA Today 2011, p. 6).According to the US Customs and Border Protection report for fiscal year 2010,more than $600,000 in counterfeit bearings was seized during the year. This repre-sented a sevenfold increase in seizures in this product category. A 2010 report by theUN Office on Drugs and Crime mentions the obvious designer products as well ascounterfeit auto parts and batteries. The US GAO (2010) also identifies electricalcomponents, household cleaners, and other household goods as examples of coun-terfeit products which may harm consumers.Home countries of firms suffering from imitated products lose exports, taxes,and other revenues as well as employment. Even host countries (here identified asthe source of the counterfeit goods) while they may experience some short-termgains in consumer welfare will probably eventually suffer a reduction in foreigndirect investment since firms may fear their products may be copied once they aremanufactured or introduced into a particular market. In addition these host countriesmay experience a growth in the underground economy, less legitimate employment,more employment at substandard wages, and reduced competitiveness because of aheavy reliance on counterfeit products. There is some evidence that exports will bereduced from countries that are known for substandard goods particularly in phar-maceutical products (OECD 2007d). Host countries also incur a loss of tax revenuesand additional costs for anticounterfeiting activities. In some cases corruption ismore widespread with the growth of a large counterfeit market.Both home and host countries may also suffer from environmental effects firstfrom the waste of destroying pirated goods and second because substandard prod-ucts may have negative effects. For instance, the use of counterfeit fertilizers
  7. 7. 13Negative Effects of Counterfeit Goodscaused serious damage and destruction of harvests in large areas in China, Russia,the Ukraine, and Italy (OECD 2007b). Various effects of pirated products cancause risks to public health and even loss of confidence in the governmentsthemselves. In 2010, the United Nations Office on Drugs and Crime (UNODC)supports these concerns stating that “[U]naccountable [counterfeit] products areoften dangerous products, and the damage is not just felt in the receiving countries:the producing countries also suffer. Even as the major brands work to improvelabor standards and workplace safety at their outsourced manufacturing sites,counterfeit goods producers take advantage of global sweatshops. As licensedmanufacturers try to improve their environmental impact standards, counterfeitersenjoy the cost savings of dirty production. In short, anywhere that the internationalcommunity attempts to establish good practice standards for industry, counterfeit-ers undercut them” (UNODC 2010, p. 10).For purposes of this book we will center on the losses to the owners of the intel-lectual property. Obviously these firms may suffer loss of revenues from royalties,sales, and profits as well as increased costs for policing and fighting pirates. Thesecosts may reduce organizational growth. In addition they may suffer from decliningcustomer loyalty through brand dilution. Because of widespread copying, somefirms may cut their investments in research and development thereby decreasinginnovation. Underwriters Laboratories (UL) summarizes the loss to genuine manu-facturers as:Legitimate manufacturers invest in research and development, quality materials, and manu-facturing processes, and they work to meet the conformity assessment schemes of theirmarkets. They work to build brand recognition and to foster goodwill with their end users.The counterfeiters that are their direct competition rely on stealing their brand names andprofiting from their goodwill and reputations resulting in the following:Direct loss of sales.•Loss of goodwill.•Irreparable damage to corporate brand/reputation.•Trademark dilution.•Costs of protecting and enforcing their intellectual property rights (IPR). (“The Impact•of Counterfeiting,” 2012, pp. 4–5).Smaller firms face displacement of management time from growing the businessto fighting the counterfeiters. Legitimate wholesalers and retailers are also harmedby counterfeit goods. First they lose revenue to the fakes. But these channel mem-bers may also be put in a difficult position when consumers ask for repairs orreplacement of counterfeit products. The end result may be a loss of confidence inthese middlemen and ultimately in the brand.One additional cost must be considered. Counterfeiting is a major funding sourcefor organized crime and terrorist organizations. The EU Organised Crime ThreatAssessment (Europol 2011) identifies Chinese organized crime groups as particu-larly active in the production and distribution of “counterfeit cigarettes, shoes, toys,and pharmaceuticals.” Other groups identified as the beneficiaries of counterfeitproducts are the Real Irish Republican Army (Real IRA), the Kurdistan Workers’
  8. 8. 14 2 The Global Growth of Counterfeit TradeParty (PKK), Hezbollah, Hamas, and al Qaeda and those who perpetrated theMadrid train bombings in 2004 (US Department of Homeland Security 2008;“Counterfeit goods linked” 2007; Anti-Counterfeiting Amendments 2004; Willson2009). The first report on transnational crime conducted by the UNODC (2010)claims that, “[M]ost organized crime problems today [2010] seem to be less a mat-ter of a group of individuals who are involved in a range of illicit activities, andmore a matter of a group of illicit activities in which some individuals and groupsare presently involved: strategies aimed at the groups will not stop the illicit activi-ties if the dynamic of the market remain unaddressed” (p. 5).Thus, either criminal organizations or individuals can provide a portfolio ofproducts and services that range from human trafficking and narcotics to counterfeitgoods. Indeed, UNODC (2010) provides separate analyses on trafficking in per-sons; smuggling of migrants; cocaine; heroin; firearms; environmental resources(e.g., wildlife taken from Africa); counterfeit products; maritime piracy; and cyber-crime. Overall, illicit traders can diversify activities and can ultimately reinvestprofits from one of their illicit business units, such as counterfeit goods, to fundanother such as human trafficking.The Economist (2008) advised brand holders to “look for the silver lining” ofpiracy. Companies can find out which songs are most popular by determining thosemost often shared on peer-to-peer networks. Or a software firm may establish itselfas the standard since the initially used pirated software creates a future market forthe real thing. But even this article advises that IPR owners should fight for theirrights despite the fact that sometimes they can use the counterfeit product to theiradvantage.The Growth of the Counterfeit Goods MarketThere is no doubt the counterfeit market is growing but it is not clear what the realmagnitude is. In 1982 the International Trade Commission estimated the worldwidesales of counterfeit goods at $5.5 billion (Abbott and Sporn 2002). Since that timemany estimates of world counterfeit goods markets have been made. In 1984 theInternational Anti-Counterfeiting Coalition estimated the worldwide market at$25–30 billion (Stern 1985). By 1996 the Economist even found a source thatgauged the market at $1 trillion. In 2001 the International Chamber of Commerceestimated that 5–7% of world trade was in counterfeit goods and that the counterfeitmarket was worth $350 billion. This 5–7% figure initially was used by the Chamberin 1997 which even then called the percentage only a “general assumption” (Bialik2007). As the OECD report (2007c) politely puts it “the metrics underlying the ICCestimates are not clear.” The OECD report says that the ICC estimates “reflect judg-ments that are not supported by clear data.” In 2006, the US government estimatedthe global market value of the counterfeit industry at $500 billion with a growth rateof 1,700% over the past 10 years (Intellectual Property Rights, 2006). As we haveseen, most estimates seem to agree on the $500–600 billion range (IACC 2007;
  9. 9. 15The Growth of the Counterfeit Goods MarketPunch 2005). It is assumed that this estimate includes all forms of IPR violationsinvolving both products and services and sales within and across country borders.The OECD (2007c) put the worldwide volume of tangible counterfeit products atabout $200 billion, an amount larger than the GDPs of 150 countries. However eventhe OECD estimates are based on incomplete information. The OECD (2007d)itself says, “available information on counterfeiting and piracy falls far short ofwhat is needed for robust analysis and policymaking” and the organization makes aseries of detailed recommendations for the improvement of data collection.According to Bialik (2007) the OECD’s estimate was originally extrapolated fromCustoms seizures based on reports from 45 countries who responded to requests fordata with enough information to be useful for analysis. A recent attempt to quantifythe counterfeit goods market was completed by Frontier Economics. They estimatevalue of the worldwide counterfeit product market at $465–650 billion in 2008(Frontier Economics 2011). Their approach is based on Customs seizure ratiosdeveloped by the OECD. But that approach raises many questions.The amount of counterfeit product intercepted by Customs services around theworld is a tiny percentage of the overall estimate of the worldwide counterfeit goodsmarket. The OECD (2007c) gives the value of seizures by Customs services in 35countries reporting this particular data at about $769 million in 2005, representing0.01% of total imports for these countries. Nevertheless, the received data wereextrapolated to the non-responding countries. Researchers used a factor of 5% forfrequently pirated goods in countries where there are a large number of pirates.Using this factor, researchers calculated a total of $100 billion then doubled thatnumber to account for “statistical variability in their model” (Bialik 2007). TheOECD (2009) updated their work at the end of 2009 claiming that the total hadreached $250 million and accounted for 1.95% of world trade in 2007. The updateuses the same methodology but adjusts for increasing world trade. Yet searching“OECD counterfeit goods report” on Google results in about 70,000 hits, most ofwhich are unquestioningly repeating either the earlier $200 billion or the later $250billion figure.Another example of this may be found in information provided by Havocscope.This organization puts forth an extremely precise global estimate for counterfeit andpiracy of $657.76 billion (Havocscope 2012) and estimates the total availability ofcounterfeit products in the United States at $225 billion. However even a cursoryreview of this organization’s website reveals problems with the numbers. Estimatesare developed from published resources such as newspapers and government stud-ies. The organization also states that “the manner in which the original source deter-mined the figure is not always available” and “the numbers will include a high levelof uncertainty. A majority of the figures will be based on estimates and will bedifficult to verify.”In Canada the cost of counterfeiting was estimated at $30 billion annually. Thisfigure, used repeatedly by many, including the US Ambassador David Wilkins in aMarch 2007 speech, originated with the Royal Canadian Mounted Police (RCMP)in 2005. Careful research by Geist (2007), Chair of Internet and E-Commerce Lawon the University of Ottawa Law Faculty, revealed that the $30 billion number was
  10. 10. 16 2 The Global Growth of Counterfeit Tradederived from two main sources: an IACC claim that 20% of the Canadian market ismade up of counterfeit product and an estimate that 3–4% of Canadian two-waytrade consists of counterfeit product given by the chief economist for the CanadianManufacturing and Exporters Association in 2005. Geist (2012) recently repeatedhis doubts about this number. The recent OECD estimate placing the total for globalcounterfeiting at $250 billion certainly calls into doubt the formerly accepted $30billion Canadian figure since Canadian trade accounts for less than 3% of worldtrade (Geist 2012).Researching the size of the counterfeit market reveals that the same numbersfrom very few sources are repeated over and over. In truth it is virtually impossibleto determine the real size of the worldwide counterfeit product market. But despitethe uncertainty of measurement methods, it appears that product counterfeiting issignificant and growing (GAO 2010; OECD 2009; Croxon 2007; UNECE 2007;ICE 2007; IACC 2007; EC-europa 2009).Effects on the United StatesThere is some confusion as to the true effect of counterfeit product upon US firms.As long ago as 1994 estimates of the US losses stood at $200 billion per year (Nilland Shultz 1996). The US Customs Service estimated that the US economy waslosing between $200 and $250 billion per year and a total of 750,000 American jobsbecause of product counterfeiting (ICE 2007). It is not clear whether these figuresare meant to refer to lost sales on a worldwide or domestic basis. Since many USfirms achieve up to 50% of their sales in overseas markets, it seems reasonable tobelieve that this figure most likely includes all worldwide sales. Certainly in orderto agree with the latest OECD estimate of $250 billion on a worldwide basis, theeffect on the US markets would have to be far smaller.Over the years the US Customs has generally increased the number of counter-feit product seizures. The graph below shows the dollar volume of seizures madefrom 1997 through 2011 (Fig. 2.2).In 1997 the US Customs stopped about $38 million worth of counterfeit prod-ucts. Seizures increased to $99 million in 1999 and then declined in 2000 and 2001only recovering to $99 million once again in 2002. Customs made counterfeit prod-uct seizures in 2006 valued at about $155 million. The dollar amount of seizures hadcontinued to increase, moving up to nearly $200 million in 2007, over $273 millionin 2008 but slipping to about $178 million in 2011 (US Customs and BorderProtection 2011).The growth in the number of counterfeit product seizures is certainly commend-able but an earlier study by the GAO (2007) suggests that the percentage of the USmarket accounted for by counterfeit product may be much smaller than has beenpreviously thought. Inspecting 287,000 randomly selected shipments from 2000 to2005 the GAO found counterfeiting violations in only 0.06%. The GAO also statedthat Customs seizures in 2005 amounted to only 0.0017% of the value of goods in
  11. 11. 17Products Counterfeitedproduct categories likely to be subject to counterfeit. The GAO analyzed all productsimported into the United States and developed a list of IP-related product catego-ries. For 2005 imports of these products totaled approximately $555 billion. Thislist was based on products where IP-related seizures had been made over the last 5years. It hardly seems possible that the US level of counterfeit goods would reachnearly 40% of all imported IP-related products which would be the case if the $200billion figure for U.S. losses from counterfeits is used.Recently, the number of seizures has been increasing (US Customs and BorderProtection 2011). In 1997 Customs stopped 1,943 shipments of pirated goods. Thisincreased to more than 3,000 in 1998 and moved steadily up to over 8,000 in 2005.The number of shipments intercepted held steady in the 14–15,000 range from 2006to 2009 and then increased to about 20,000 in 2010 and nearly 25,000 in 2011. Thiscan clearly be seen in the graph below. Since the total dollar value of seizures hasdecreased while the number of shipments intercepted has increased, it is obviousthat the average value of an IPR seizure dropped significantly, from $17,566 in 2009to $7,180 in 2011 (Fig. 2.3).The earlier GAO study raises questions about the usability of the Customs sei-zure data as an indicator of the size and growth of the counterfeit market. First itappears that enforcement varies widely between ports with some ports finding 100times the amount of counterfeit products as other ports. Only ten ports accountedfor a quarter of seizure value and 84% of penalty cases since 2001. The pressure tomove products through ports and airports is very high especially since imports hadgrown from about $1.2 trillion in 2001 to about $1.7 trillion in 2005, and shipmentsfiled with Customs up about 25% over the same period.Products CounterfeitedProducts that are most vulnerable to product counterfeiting fall into four categoriesaccording to Jacobs et al. (2001):019971999200120032005200720092011100200300US Customs Seizures(US$mil)Fig. 2.2 US CustomsSeizures (US$ million).Source: US Customs andBorder Protection (2011)
  12. 12. 18 2 The Global Growth of Counterfeit TradeHighly visible, high volume, low tech products with a well-known brand names•such as toothpaste and chocolate.High-priced, high-tech products such as computer games, CDs, DVDs, auto and•airplane parts.Exclusive prestige products such as clothing, apparel, and perfume.•Intensive R&D, high-tech products such as pharmaceuticals and some industrial•products.More contemporary research indicates that the types of products being counter-feited are expanding. The OECD (2007) found a shift from high-value luxury itemsto common products and an expansion of the range of pirated luxury products. Theirlist of products subject to intellectual property infringement includes all the producttypes identified by Jacobs et al. but also chemicals and pesticides, electrical compo-nents, food and drink and agricultural products, tobacco products, furniture, sportinggoods, and a variety of other items including qualification certificates. In the OECDstudy (2007d) 13 countries reported that the scope of products counterfeited wasexpanding rapidly and 16 other countries said the range was expanding steadily.Naim (2005) also supplies an exhaustive list. He identifies the Chery QQ, madein China, as an automobile which has the look and feel of the Chevrolet Spark. Healso describes forgeries of American-made sewer pumps and Italian valves. Hopkinset al. (2003) tell of counterfeit aircraft bolts as well as helicopter blades.In the United States, types of products seized vary from year to year but wearingapparel and footwear have often topped the list since 1982. Pirate optical media,computers, and pharmaceuticals are nearly always among the most frequently seizedproducts. The total value of confiscated cigarettes has appeared in the top ten for thepast 2 years. The table below describes the latest US government seizures by value(Table 2.1).Recent data from the European Union show similar product patterns. EU Customsreported the value of seized product (designated as “detentions” by the EuropeanCommission) at €1,110,052,402 for 79,112 cases. Seizures included over €200 mil-lion in clothing and accessories, €166 million in various types of shoes, approxi-mately €100 million in bags, wallets and purses, €94 million in watches, and €76040008000120001600020000240001997 1999 2001 2003 2005 2007 2009 2011US Customs Seizures(number)Fig. 2.3 US CustomsSeizures (Number).Source: US Customs andBorder Protection, 2011
  13. 13. 19Products Counterfeitedmillion in mobile phones and accessories. Nearly €125 million in counterfeit cigaretteswas seized in 2010 (European Commission 2011a, 2011b, 2011c, 2011d).Software is particularly vulnerable to copying. According to the most recentBusiness Software Alliance (BSA) study more than 40% of software used world-wide is pirated. Such widespread copying amounts to $59 billion in annual lossesfrom counterfeiting according to the software industry (BSA/IDC 2011e). In arecent case Microsoft, working with the US and Chinese authorities, built the “larg-est [software] counterfeiting case in history” against a criminal ring believed to haveaccounted for more than $2 billion in counterfeit Microsoft product from 2003 to2008. Eleven members of the ring were convicted, receiving prison terms of 1½–6½years (Microsoft 2010).The growth of counterfeit pharmaceuticals, the so-called SFFC drugs, has takena heavy toll. Almost one decade ago, a healthy 22-year-old Argentinean woman wasgiven iron injections to cure her mild anemia. In December 2004 she died of liverfailure. It was determined that she had been given a toxic counterfeit but the authori-ties were unable to determine the source of the product because of falsified paper-work. A recall was begun but the fragmented distribution system made it impossibleto take the entire harmful product off the market.In 2008, the blood thinner Heparin was found to have counterfeit active ingredi-ents sourced from Changzhou SPL in China. In this case, this ingredient was replacedby a substitute, eventually resulting in as many as 81 deaths. Baxter, the firm whichsold the drug in the US, faced 740 lawsuits and eventually sold the division thatproduced the drug. In 2009, a Chinese antidiabetic medicine containing six times thenormal active ingredient was blamed for the deaths of two people. In 2012, The WallStreet Journal reported the problem of a counterfeit cancer-treating drug, Avastin®,distributed by way of Canadian Internet pharmacies on a trade route that, “illustratedthe circuitous path that pharmaceuticals can take before reaching consumers.WhereverthecounterfeitAvastin®wasmanufactured—possiblyChina—investigatorsTable 2.1 FY 2011 top IPR commodities seizedCommodity Domestic value ($) % of totalConsumer electronics 38,992,613 22Footwear 25,562,613 14Pharmaceuticals 16,848,192 9Optical media 15,567,059 9Wearing apparel 14,755,599 8Perfume/cologne 9,456,208 5Watches/parts 8,435,256 5Cigarettes 8,183,993 5Computers/hardware 7,814,457 4Toys/electronic games 7,597,367 4All other commodities 25,419,276 14Total FY 2011 domestic value 178,322,633Number of seizures 24,792Source: US Customs and Border Protection
  14. 14. 20 2 The Global Growth of Counterfeit Tradeare examining a zigzagging route that may have taken the product through Turkeyand Egypt before it was sold to Swiss and Danish wholesalers and then to Mr.Haughton’s [a Canadian citizen] UK wholesaler, River East Supplies Ltd” (Weaveret al. 2012, p. 9). The myriad of distribution points (both physical and virtual) usedin the recent case is illustrated in Fig. 2.4.Large and Small Firms AffectedBoth large and small firms are fighting against unauthorized copying of their prod-ucts. An example on the smaller end is ABRO, a private branding auto-parts dis-tributor. The firm has built its sales to $180 million and offers more than 600 productsunder the ABRO brand name. Peter Baranay, president and chief executive of thefirm, is aggressive in fighting against counterfeiters, spending about $1 million peryear to do so. They claim success in fighting counterfeiters in China, Pakistan, India,and Saudi Arabia (Morton 2011). Another small firm that faced counterfeiting wasHeelys, a manufacturer of sneakers that incorporate wheels in the heel. When firstintroduced the product took off with sales increasing over 250% to about $188 mil-lion by first quarter 2007. At the time, Heelys employed less than 50 people, andhad arranged for manufacture of their products in South Korea and China. As aresult one Korean firm was selling a one-wheel roller shoe called “Heatys” (Phillips2007; Heelys, Inc 2007a, 2007b). Since 2002 Heelys has been fighting counterfeitsin China. Despite a ruling from the Chinese government that two factories wereviolating Heelys’ patents, a year passed before the government took action.Moreover, this delay was followed by minimal corrective action, amounting toconfiscation of just a few cases of counterfeit shoes and a promise not to make anymore copies (Yung 2006).At the other end of the scale is Starbucks, a firm with more than $12.2 billion insales and nearly 150,000 employees (NY Times 2012). Starbucks has been fightingto protect its trademark around the world. In Russia the firm regained its right to useits brand after a favorable ruling against a “trademark squatter.” Anyone visitingShanghai will see not only a number of Starbucks locations, but also copycats ofevery kind. One Shanghai coffee house was using the name Xingbake, a cleverknockoff of the Starbucks name. In Pinyin “xing” means star, and “bake,” pro-nounced bah-kuh, sounds like bucks. Thus, the coffee house name replicated theStarbucks brand name using a combination of Chinese characters and sound.Starbucks sued in 2003, asserting that its trademark had been registered in Chinasince 1996. In early 2006, a Shanghai court ordered Xingbake Café to discontinuethe use of their version of the Starbucks name, and required that it pay Starbuck’s500,000 Yuan, equivalent to about $62,000, in damages. This was the first ruling ofits kind under a 2001 Chinese law (Noon 2006). Few firms have been successful inlegal proceedings in China. The Walt Disney Co. was the first to receive damageswhen a Beijing Court ruled in 1999 against Chinese companies for their productionof children’s books based on Disney’s animated films. Disney received a $77,000
  15. 15. 21Large and Small Firms Affectedjudgment (Faison 1995). Nike, a $30 billion firm, has also been fighting counterfeitsfor years. A few years ago, the German Customs Department seized what couldhave been the largest cache of counterfeit goods—one million pairs of phony Nikesneakers, in a total of 117 shipping containers worth nearly $500 million(“Counterfeit Sneakers” 2006). After breaking up a large counterfeit market fortheir products in the Ukraine, Procter & Gamble found that 43% of hair care prod-ucts and 23% of laundry products branded with their name were actually counter-feit (UNECE 2007).A particularly brazen case of counterfeiting was discovered in Summer, 2011(BBC 2011). An American visiting Kunming, China found three fake Apple stores.The décor and staff mimicked the genuine stores and the workers even believed theywere working in one. After launching an investigation, Chinese authorities eventu-ally found 22 of these unauthorized stores.Apparently this is a common occurrence in the PRC. A few years ago, managersat the Tokyo headquarters of NEC learned that pirated keyboards, CDs, and DVDsFig. 2.4 Estimated trade routes of fake Avastin®. Source: Weaver, C., Whalen, J., & Faucon, B.(March 7, 2012). Drug distributor is tied to imports of fakes. The Wall Street Journal
  16. 16. 22 2 The Global Growth of Counterfeit Tradewere on sale in Beijing and Hong Kong. All the products were branded NEC. Aftera 2-year investigation in cooperation with governments in China, Taiwan, and Japan,the company discovered that pirates were attempting to set up a complete companybearing the NEC brand. This operation included the involvement of more than 50electronics factories in China, Hong Kong, and Taiwan. Some of the factories evenhad phony NEC signs out front and used official-looking packaging, as well as war-ranty and service documents. The pirates manufactured a range of 50 products toimitate the company’s entire product portfolio. Some of the factories had official-looking documents which they insisted gave them a license to manufacture NECgoods (Lague 2006).Reasons for the Growth of Counterfeit GoodsA number of reasons have been given for the growth in the counterfeit goods market.These driving forces are shown in the figure below (Diagram and this sectionadapted from our primary research and UNODC TOCTA Report 2010; Staake et al.2012; “Why Fakes are Booming” 2008; OECD 2007d; Harvey 1987; Hopkins et al.2003; Naim 2005; Nill and Shultz 1996; Jacobs et al. 2001; Morris and Stevens2007; Parloff 2006; Punch 2007; Stern 1985; Thomas 2007) (Fig. 2.5).There are seven major driving forces behind the worldwide growth of counterfeitgoods. These can be identified as low cost high technology which results in lowinvestment and high profits; globalization and lower trade barriers; consumer com-plicity; expansion of channels and markets; powerful worldwide brands; weak inter-national and national enforcement, and finally high tariffs and taxes. Each of theseis explored in the following sections.Low Cost High Technology=Low Investment, High ProfitsPirates avoid all the usual costs related to creating and marketing a product, includ-ing research and development, advertising, and warranty service. They also avoidthe costs of meeting health and safety, quality control, and minimum wage regula-tions. Staake et al. (2012) point out that some counterfeiters experience high costslicit manufacturers do not face. According to their analysis product seizures are themajor costs impacting these pirates. Nevertheless, without the start-up and overheadcosts of legitimate manufacturers counterfeiting may be vastly profitable. Theseresearchers estimate counterfeiters experience margins two-thirds higher than licitmanufacturers with no tax burden applied to the profits.Many products can be manufactured with easily purchased high technologyequipment that is widely available at reasonable prices. And technological develop-ments in modeling, printing, and scanning make it easy to make convincing copiesthrough reverse engineering. According to Fortune, manufacturers themselves have
  17. 17. 23Reasons for the Growth of Counterfeit Goodsshared technology and know-how including designs, molds, specifications, andtrade secrets with various subsidiaries, licensees, contractors, and subcontractors inmarkets all across the world and therefore “it’s extremely hard to police global sup-ply chains, and IP is leaking out through 1,000 cracks.” In the fashion industrypirates can buy one copy of a genuine product, take it apart and using scanningequipment, develop patterns which allow them to make almost perfect fakes (Parloff2006). Dr. Frederick Mostert (2008), past president of the International TrademarkAssociation, describing digital fakes in a Financial Times supplement says, “everyproduct known to mankind can, and is, being perfectly copied.” He describes per-sonally witnessing software and scanners which allowed reverse engineering ofhighly complicated watches.One example of the rapid reduction in cost for technology is computer equip-ment, which formerly was priced out of the grasp of most pirates, and is now avail-able at a fraction of the cost. Doms (2003) shows the cost of computer equipmentdeclining between 14 and 17% annually from 1991 to 2000. This makes copying ofDVDs and CDs quite simple and inexpensive. This computer equipment, combinedwith high quality digital printers, also makes it easy to imitate genuine trademarksand packaging. Counterfeiters have also improved their ability to reproduce holo-grams and other sophisticated genuine identifying marks. Searching the Internetwill give a pirate many sources for manufacturing equipment. Purchasing softwareGrowth ofCounterfeitGoods TradeLow Cost HighTechnology=LowInvestmentHigh Profits Globalizationand LowerTradeBarriersContinuingConsumerComplicityExpansion ofDistributionChannels andMarketsPowerfulWorldwideBrandsWeakInternationaland NationalEnforcementHigh Tariffsand TaxesFig 2.5 Reasons for the growth of counterfeit goods trade
  18. 18. 24 2 The Global Growth of Counterfeit Tradeto help in manufacturing is also easy with some of it even available on the counterfeitmarket. Since manufacturing is driven by software, getting the right CD allowspirates to make a clone that looks right but uses lower grade materials.The decline in the cost of communications is also a boon to pirates. For instance,Doms (2003) estimates the cost of cell phones fell an average of 17% from 1983 to1997. The Internet also allows pirates to keep in contact with their distribution out-lets at very low cost and with high security.Of course, the lowest investment of all is faced by subcontractors who engage in“split runs,” a term used by Chris Israel, former US Coordinator for InternationalIntellectual Property Enforcement. This means making legitimate products undercontract to brand holders by day and then either high quality overruns or poor qual-ity imitations by night after the official shutdown of the factory. These so-calledthird shift products (USITC 2011), even if they are indistinguishable from genuineproducts, are most definitely counterfeit by our definition and have been found to beso in some courts.Globalization and Lower Trade BarriersThe rapid growth of world trade through the opening of markets, coupled with thereduction of barriers to financial and merchandise flows, has certainly openedopportunities for product pirates. The sheer volume of imports in many countriesmakes it almost impossible for Customs Services to interdict phony products.According to Deutsche Bank Research (2011) more than 25 million containersflowed through each of the ports of Shanghai and Singapore, ten million throughRotterdam and more than five million through Los Angeles in 2009. Between 1990and 2008 total container throughput grew at an average annual rate of 10%. In 2011,Maersk, a leading shipper with an estimated 14.4% of container-fleet capacity, pre-dicted more than an 8% growth in the global container market (Leach 2011).The advent of NAFTA and the closer cooperation within the European Unionmeans fewer checks on products flowing across borders. Just since 1999, accordingto the World Trade Organization (2012), annual world trade in goods and serviceshas doubled from less than $6 trillion to about $19 trillion in 2010 (Fig. 2.6).During the same time, the average tariff applied to imports by developing coun-tries declined from 16.5% in 1996 to less than 10% in 2011, and in the most devel-oped countries the average tariff declined from 5.3 to 2.7% over the same period(World Bank 2011).Free-trade zones can serve as safe havens for counterfeiters. There are now about3,000 in about 135 countries (Shah 2010). The OECD (2007e) reports that free tradezones and free ports are used by counterfeiters in three different ways. First, prod-ucts are shipped into the free-trade areas and then re-exported. This allows thepirates to engage in “origin laundering” whereby the true origin of these products isobscured or erased by moving them through a number of ports and sometimes alter-ing the documentation accompanying the shipments. Second, unfinished products
  19. 19. 25Reasons for the Growth of Counterfeit Goodsmay be shipped to these free-trade areas for further processing including addingcounterfeit trademarks or labels or repackaging. Finally, free-trade areas are usedfor manufacturing pirate goods.An important seizure revealed that large amounts of counterfeit drugs were sup-plied through a complex arrangement using a free-trade zone known as Jebel Ali inDubai, United Arab Emirates (UAE). This free-trade zone, the oldest in the Emirates,handles 11 million containers each month (Shah 2010). The drugs were originallymanufactured in China, sent through Hong Kong to the free-trade zone in Dubai toBritain then the Bahamas and finally back to Britain where the products were mailedto customers with UK postage. They were sold on an Internet site which madeAmerican customers believe they were buying medicines from a Canadian website.The sheer size of Jebel Ali makes it extremely difficult to track down counterfeitproduct. In addition there is a “murky line of authority” for rooting out counterfeitsthere (Bogdanich 2007).The free flow of financial resources has also been helpful to counterfeiterssince it is relatively easy for them to launder profits from pirate operations and tomove investment and therefore production from one country to another. Exchangecontrols have been reduced or eliminated in most countries. The growing wiretransfer industry including Western Union and even the expanding use of ATMcards make it easier for counterfeiters to move their funds to the most advanta-geous markets. Chaudhry and Stumpf (2010) assert that, “[A] key issue that hasbeen ignored by most anti-counterfeiting studies is money: how to stop the cross-border flow of funds needed to make this illicit trade solvent. The trade in fakesrequires massive amounts of funds that are facilitated across borders. Middlemeninvolved in the money supply chain are potential targets to choke the flow of illicitgoods.” (pp. 311–312).05000000100000001500000020000000250000002005 2006 2007 2008 2009 2010World Exports(US$ millions)Services Merchandise TotalFig. 2.6 Annual world trade. Source: World Trade Organization
  20. 20. 26 2 The Global Growth of Counterfeit TradeConsumer ComplicityThere is a great deal of evidence to suggest that consumers are all too willing topurchase counterfeit products even when they know the products are fake. Culturaldifferences can account for the popularity of counterfeiting. In a study of consumerwillingness to obtain fake pharmaceutical and/or movies in Brazil, Russia, India,China, or the United States, we found varying levels of complicity for movies andpharmaceuticals (Chaudhry et al. 2011a, b). For example, Russian consumers hadan 80 and 11% willingness to obtain illicit movies and pharmaceuticals respectively.Some years ago the Journal of Commerce (1999) reported that IPR is a Westernconcept and IPR infringement is not seen as morally wrong in China. This will beexplored in more detail in Chap. 9.In an early study, Tom et al. (1998) found that consumers are willing to purchasecounterfeit goods for a variety of reasons, including a perception of the counterfeitto be as good as the authentic version; support of the counterfeit market as a meansof expressing anti-big-business sentiment; and lax attitudes about the legal protec-tion of intellectual property. Many analysts have attempted to generate a descriptiveprofile of a consumer who knowingly engages in illicit trade. Variables such asgender, age, ethnicity, occupation, and level of income have been assessed fordecades with inconsistent results. For example, Eisend and Schuchert-Güler (2006)found that both demographic (e.g., age, education, income) and psychographic vari-ables (e.g., willingness to take risks) identify consumers that were more receptive tofake goods. However, in one of our recent studies (Chaudhry et al. 2011a, b) wefound that antecedents with the greatest impact on consumer attitudes towards anddecisions/intentions to obtain fakes are product (i.e., price and quality) and purchasesituation/mood. In contrast, demographics and national origin were poor predictorsof complicity (p. 235).Research completed by the authors revealed that, in markets where a firm wasexperiencing the most difficult counterfeit problems, over two-thirds of managersinterviewed believed that consumers were willing to purchase a counterfeit good.We asked managers to rate the importance of specific product attributes that mightbe used by a consumer to determine whether a good was counterfeit or legitimate.According to the managers we surveyed, consumers are fairly sophisticated.They can tell by price and by where they purchase the product whether it is legiti-mate or counterfeit. In any event consumers are quite willing to purchase counter-feits (Table 2.2).This important subject is reviewed in depth in Chap. 5.Expansion of Channels and MarketsWith the growth of world trade, manufacturers have penetrated many markets whichthey were unable to serve only a few years ago. The emergence of an affluent classin Brazil, Russia, India, and China (BRIC countries) offers huge new markets for
  21. 21. 27Reasons for the Growth of Counterfeit Goodsproductswithwell-knownglobalbrands.Counterfeitershavethreemajordistributionoutlets to customers: established retail shops, informal channels such as “flea mar-kets,” sidewalk vendors and clandestine shops, and of course the Internet.While it is difficult for pirates to gain any real market share in well-establishedretail outlets, research suggests that the sale of counterfeit product through thischannel is increasing. Although a British Home Office survey found that 44% of thebusinesses in three high-crime areas had been offered counterfeit goods in the yearprior to the survey, generally it is most likely that legitimate retailers selling coun-terfeit products are not aware that the products are illegitimate (UNODC 2010).A more common distribution method for fake products is through informal chan-nels. A walk along Canal Street in New York City, Santee Alley in Los Angeles orNanjing Lu in Shanghai will reveal a number of street vendors selling every kind ofpirated product. Flea markets around the world feature branded products at impos-sible prices. On a recent trip to Shanghai one of the authors was able to spot fakeCalloway golf clubs right next to counterfeit Docker shorts, being sold openly all inthe same market. Toth (2007) describes a harrowing experience searching for coun-terfeit handbags in New York’s Chinatown, being admitted to back room and base-ment “retail outlets.” In the case of auto or aircraft parts, health and beauty aids,pharmaceuticals and even wearing apparel, the sheer complexity of distributionmakes it easy for counterfeiters to intervene at some step to substitute copies for thereal thing.The Internet has provided an irresistible opportunity for pirated product. Thischannel allows a producer of counterfeit products to reach a nearly unlimited world-wide audience with his offers. Although it is extremely difficult to measure the sizeof this market The Economist estimated (2003) $25 billion in counterfeit goods wastraded online annually. Virtually every type of product is now sold across the Internetand consumers have gained more confidence when using this channel. InternetWorld Stats (IWS) estimates that as of December 2011 there were more than twobillion Internet consumers in the world with a global penetration rate of nearly 33%(Internet World Stats 2011). One brazen site claiming to sell “replicas” is calledTable 2.2 Product attributes used to determine authenticityProduct attributeImportance in determining productauthenticity (% choosing)Price 88Point of purchase 88Slight difference in brand name 75Packaging 56Quality 50Warranty 38Anticounterfeiting label 31Sources: Adapted from Chaudhry, P., Peters, J., Zimmerman, A., & Cordell, V. (2008). Evidence ofmanagerial response to the level of consumer complicity, pirate activity, and host country enforce-ment of counterfeit goods: An exploratory study. Multinational Business Review, 17(4), 32
  22. 22. 28 2 The Global Growth of Counterfeit It features knock-off Rolex watches, Guccihandbags, and Tiffany earrings. Photos of the real products are positioned next tothe fakes with the question posed by the site itself: “can you see the difference?”The OECD (2007) gives five major reasons for pirates’ attraction to theInternet:• Anonymity—it is easy for counterfeiters to conceal their true identities and lowerthe risk of detection.• Flexibility—pirates can easily establish an online site then take it down or moveit within 24–48 h to markets where IPR enforcement is weak.• Market size—the sheer number of e-commerce sites and listings makes it verydifficult for IPR owners and enforcement agencies to find and take action againstpirates.• Market reach—the Internet allows sellers to reach a huge global audience at lowcost 24 h a day.• Deception—widely available software and images on the Internet make it easyfor pirates to create “clone” websites that look almost exactly like the brandholders’ official sites.Auction sites like eBay are popular venues for counterfeit product. Althoughthere is some controversy related to the actual number, one source claims eBay isnow host to more than 150 million listings at any given time (Power Sellers 2012).By some estimates eBay accounts for about 15% of Internet fraud which results inan estimated $32 million in annual losses (Berntsen 2010). One way to measure thisis to look at the number of designer items for sale on sites like eBay. The truth ismajor designers rarely sell their products across the Internet nor do they license oth-ers to sell online. The inability of buyers to look carefully at these items makes iteasy to sell fakes. Tiffany & Co. filed suit against eBay claiming that only 5% ofTiffany items for sale on the auction site were genuine (Punch 2005). Tiffany alsoclaimed that eBay had a financial interest in looking the other way when it comes tocounterfeit products sold on their site. The US courts did not agree with Tiffany,finding that eBay was not liable for trademark infringement that occurred on theirsite (Leu 2011).Counterfeit drugs are an especially troubling aspect of Internet sales. Some Internetpharmacies are legitimate but there are many which provide prescription drugs just forthe asking. In many cases these drugs are counterfeit. They may not produce the cura-tive effects of the real thing or in the worst case they may do untold harm.Powerful Worldwide BrandsGlobalization has made it possible to develop truly global brands. Brands such asCoca-Cola, Apple, Chanel, and Google are recognized all over the world and havebecome hugely valuable assets. For instance, the world’s most valuable brand isCoca-Cola and is worth about $72 billion. IBM’s brand is valued at about $70 billion
  23. 23. 29Reasons for the Growth of Counterfeit Goodsand not far behind are Microsoft and Google each of which is worth over $50 bil-lion. Each of these brands and many others have been subject to extensivecounterfeiting (“Best Global Brands” 2011). One 2009 study looking at the impactof counterfeiting on consumers’ brand relationships in India and Thailand statedthat “consumers are drawn to premium brands in part because of the exclusivity andconnotation of prestige associated with them. These characteristics are also the rea-son such brands are attractive targets of counterfeiting” (Commuri 2009).Consumers in Shanghai, London, Mumbai, and Moscow are now completelyfamiliar with these brands. As described above these consumers want these brandsbut many cannot afford to purchase the legitimate items. This has given rise to sup-pliers who fill the need for products with famous brands at much lower prices.Weak International and National EnforcementThe risk of starting a counterfeit products business is rather low in many countriesfor one very good reason: weak enforcement of intellectual property regulations.US laws such as the Tariff Act of 1930, the Lanham Act, the TrademarkCounterfeiting Act of 1984, and the Stop Counterfeiting in Manufactured GoodsAct of 2006 are all designed to provide some form of legal recourse for the ownersof intellectual property through civil and criminal law penalties in the United States.In addition, the NAFTA treaty, The Agreement on Trade-Related Aspects ofIntellectual Property Rights (TRIPS) in the World Trade Organization (WTO), andthe Scrivener regulations of the European Union are international measures imple-mented to encourage protection of intellectual property rights. For a detailed discus-sion of these multilateral trade agreements, see Chaudhry and Walsh (1995, 1996).Although there are a number of national laws and international agreementsdesigned to protect intellectual property rights, according to Chaudhry and Walsh(1996), “legal remedies available to the victims of counterfeited or pirated goodshistorically have been inadequate.” Recent attempts to strengthen anti-piratingactivities on the Internet have resulted in widespread public criticism. The proposedUS laws Stop Online Piracy Act (SOPA) and the Protect Intellectual Property Act(PIPA) were so widely disliked that the US Congress decided not to go ahead witha vote on either. A similar international measure the Anti-Counterfeiting TradeAgreement (ACTA) is also facing worldwide protests (Jolly 2012).A recent example of the relationship between penalties and profits was revealedwhen three men were arrested for selling phony Procrit, a very expensive drugwhich is a clear liquid. The men simply filled vials with water, then packaged themusing genuine-looking boxes, labels, and inserts. Although the men were convicted,their sentences were less than they would have received for selling illegal narcotics(A Crime with Huge Profits 2012).Naim (2005) attributes the lack of enforcement to government fiscal restraintimposed by the demands of the global capital markets. Since investors are “turnedoff” by large government deficits, these governments have had to cut funding to law
  24. 24. 30 2 The Global Growth of Counterfeit Tradeenforcement. In addition these governments cannot compensate their civil servantsadequately leaving them no alternative but to accept bribes from counterfeiters andto limit their enforcement activities. The extreme example of this is the so-calledfailed state, where criminal elements can capture the government. The recent world-wide financial crisis has only increased the strain on government budgets and hasprobably necessitated reductions in anticounterfeiting activities.The descriptions in an earlier part of this chapter of the problems faced by ABRO,Heelys, Disney, and Starbucks in China and the paltry fines levied on the piratesreinforce the idea that the rewards of counterfeiting far outweigh the potentialpenalties.High Tariffs and TaxesWe have seen how lowering trade barriers has increased trade, creating opportuni-ties for counterfeit product to be made in one country and exported to others. At thesame time, while it may seem counterintuitive, high tariffs and taxes can createopportunities for counterfeiters as well. These extra costs price consumers out ofcertain markets especially in less developed countries. In the case of disease-curingdrugs, consumers may be aware that products are available and they are obviouslyhighly motivated to get these products. Where governments have placed artificialprice controls or import duties on these drugs counterfeiters may step in to supplythe demand, offering far less effective or even dangerous products at affordableprices. According to Morris and Stevens (2007) combined total duties and taxes onretail medicines in 11 developing countries in 2003 ranged from 24% in Mexico to55% in India. Many high-tariff countries have a serious problem with counterfeitmedicines and the authors state “it is unlikely that this is entirely coincidental.”Highly taxed products such as alcohol and cigarettes often show a direct relation-ship between the level of taxation and the extent of counterfeit product available. InIreland, where cigarette excise taxes were raised sharply between 2000 and 2009,the inflow of contraband products increased to 25% of the market over the sameperiod (ITIC 2011).The same logic may be applied to branded luxury goods where extensive adver-tising and highly visible retail outlets create demand but high prices deter mostconsumers from purchasing the products. This umbrella is one counterfeiters willmost happily step under where investment and potential penalties are limited andrewards are significant.ConclusionsAlthough product counterfeiting is certainly not a new phenomenon, much moreattention is being paid to it in recent years. As we have seen counterfeit productsmay go back more than 2,000 years and punishment for infringement at least 700
  25. 25. 31Conclusionsyears. Products which can be classified as counterfeit are those made withoutauthorization from the owners of IPR (trademarks and patents and copyrights)associated with those products.The measurement of the counterfeit market is fraught with difficulty. Given theillegal nature of the activity no direct measurement is possible. Compoundingthe problem is defining what exactly is being measured. Is it sales lost and should itbe calculated based on current retail prices? Or should damage to brand equity beadded? Those making the estimates, such as the OECD and the International TradeCommission, readily admit their methodologies leave much to be desired.Nevertheless the global value of counterfeit products at $600 billion seems to havegained acceptance. Some see the number as much higher and claim that 5–7% ofworld trade is in counterfeit. Since the actual seizures by Customs agencies aroundthe world represent approximately 1/10 of 1% of total imports, one must say the truenumber is not known with any confidence today.Products counterfeited at one time were limited to high-priced, high-tech, highlyvisible branded and intensive R&D products. But today nearly every consumer andindustrial product is subject to counterfeiting. The existence of a counterfeit goodsmarket damages consumers as well as home and host countries, the owners of theintellectual property both large and small, and their associated wholesalers andretailers. There is evidence that organized crime and terrorist organizations are usingthe proceeds from counterfeit products to finance their activities. As we have seen,counterfeit drugs exact a tragic toll upon the often uneducated users. There are sevenmain drivers of the growth of counterfeit goods, many associated with the reductionin the cost of high technology and the increasing openness provided by globaliza-tion. The Internet has afforded counterfeiters a nearly unlimited market, low-costcommunications, and the means for avoiding detection. Weak enforcement of bothnational and international intellectual property protections has made counterfeitinga low-risk market entry strategy.
  26. 26.